Tuesday, August 19, 2014

Guest Post - Delhi Airport Metro Case: Twilight Zone of the “pro-arbitration” trend

[The following post is contributed by Sujoy Chatterjee who is an Advocate in New Delhi and an alumnus of the National Law University Jodhpur (’13)]

In recent times, there has been a propensity towards characterizing judgments of the Indian judiciary either as “pro-arbitration” or “against the pro-arbitration trend” (for example, see here, here and here). The rationale behind this tendency of binary characterization seems to be that a judgment which, inter alia, upholds the validity of an arbitration agreement, allows arbitration proceedings to commence or continue, etc, is a step in the right direction. However, as pointed out on this Blog (see here), a facially “pro-arbitration” judgment may yet create or propagate principled confusion, giving rise to further litigation in future. This author believes that rather than focusing solely on the outcome of a judgment, it is the contribution the judgment makes towards our arbitration jurisprudence which ought to determine whether the judgment is truly pro-arbitration.

It is in this background that the Delhi High Court’s judgment in Delhi Airport Metro Express Limited v. CAF India & Anr., pronounced on 14 August 2014 is significant. The judgment, which in its outcome allowed an Indian party to proceed with arbitration proceedings in London against another Indian party, ironically arrives at this conclusion by keeping its analysis of arbitration jurisprudence to a minimum. Therefore, while its ultimate ruling is undoubtedly “pro-arbitration”, Delhi Airport Metro’s rationale for this ruling is grounded in contractual provisions and principles of contract law as opposed to the nitty-gritties of arbitration law.

By way of background, Delhi Airport Metro Express Limited had entered into a Maintenance Services Agreement on 30 June 2008 with Construcciones Y Auxiliar De Ferrocarriles, SA (CAF), a company incorporated in Spain. The Maintenance Services Agreement contained an arbitration agreement, which inter alia provided:

(i)         the seat of the arbitration as London, i.e., a place outside India; and

(ii)      the express exclusion of Part I of the Arbitration and Conciliation Act, 1996 (the Act).

(The double layer of protection, i.e., a foreign seat as well as the express exclusion of Part I of the Act, was presumably included in the arbitration agreement to avoid any confusion regarding jurisdiction of Indian Courts, since the Maintenance Services Agreement was executed at a time when Bhatia International v. Bulk Trading held the field in India.)

On 17 May 2010, CAF executed an Assignment Agreement in favour of CAF India, a wholly owned subsidiary of CAF and an entity incorporated in India, whereby the rights and obligations of CAF under the Maintenance Services Agreement were transferred to CAF India. Thereafter, certain contractual disputes arose between Delhi Airport Metro Express Limited and CAF India with regard to the Maintenance Services Agreement, and on 21 January 2014 CAF India submitted its request for arbitration jointly with CAF as per the arbitration agreement contained in the Maintenance Services Agreement. Delhi Airport Metro Express Limited approached the Delhi High Court challenging the validity and enforceability of the arbitration agreement, thereby questioning the legality of the arbitration proceedings and requesting for a restraint on CAF India from pursuing arbitration proceedings in London.

Delhi Airport Metro Express Limited argued, inter alia, that both it and CAF India were Indian companies and therefore it would go against the public policy of India if the arbitration agreement was given effect to. The rationale behind this argument was that two Indian parties could not, either by choosing a foreign seat or by expressly providing so in their agreement, exclude the applicability of Part I of the Act or attempt to avoid the applicability of the laws of India.

Per contra, CAF India contended, among other things, that Section 5 of the Act mandated minimal judicial intervention and that this principle applied equally to international commercial arbitration as well as domestic arbitration. CAF India also argued that Delhi Airport Metro Express Limited’s suit was barred by Section 14(2) of the Specific Relief Act, 1963 and that the High Court did not have jurisdiction to entertain an anti-arbitration suit.

Manmohan Singh, J. begins his analysis of Delhi Airport Metro by crystallizing the issue as follows:

the question which falls for consideration is as to whether pursuant to the Assignment Agreement dated 17th May, 2010, the rights and obligations of the Defendant No. 2 which is a Spanish Company are completely discharged under the Maintenance Agreement and other agreements between the parties so as to say that it has no role to play in the rights and obligations of the parties under agreement and had exit completely from the agreement. If the answer to the said question is in affirmative, then only the case of the plaintiff and grounds stated therein merits further consideration and on the other hand if the answer is in negative, then the case of the plaintiff is not even required to be further considered as the entire premise of the suit may fail.

(emphasis added by this author)

Framing the issue thus, Manmohan Singh, J. pre-empted an arbitration-centric discussion and proceeded on an astute analysis of the terms of the Assignment Agreement and the Maintenance Services Agreement, as well as Section 62 and Section 43 of the Indian Contract Act, 1872.[1] This analysis culminates with the Court’s conclusion that the obligations of CAF had not been completely discharged under the Maintenance Services Agreement and that CAF continued to have obligations under the Maintenance Services Agreement. On this basis the Court concluded that CAF remained a party to the Maintenance Services Agreement, and therefore the Assignment Agreement did not have the effect of transforming the nature of the arbitration agreement in the Maintenance Services Agreement from an international commercial arbitration to a domestic arbitration.

The only aspects of arbitration law which were briefly touched upon in Delhi Airport Metro were (i) the doctrine of separability, and (ii) the applicability of Section 5 of the Act to the present case. The Court, albeit en passant, opines how an arbitration clause may survive the novation of the main agreement and how section 5 may operate as a hurdle to the maintainability of the suit in the present case. However, even this brief discourse is subjected to a broad rider, i.e., the Court’s finding on these points is independent of the fact that there was no novation to the Maintenance Services Agreement in the present case and that the issue of maintainability did not require adjudication at this stage.

In conclusion, the Court held that since one of the parties to the arbitral proceedings (i.e., CAF) was a party incorporated under the laws of Spain, therefore the proceedings fell within the realm of Section 2(1)(f) of the Act as an international commercial arbitration. The Court ruled that the arbitration agreement as well the arbitral proceedings did not fall foul of Indian public policy by choosing London as the seat of arbitration and by excluding the applicability of Part I of the Act.

Delhi Airport Metro has very subtly highlighted the importance of (i) identifying and addressing the core issues in a dispute, rather than delving into the technicalities of arbitration law merely because the dispute is arbitration-centric; and (ii) reading in-between the lines of a judgment rather than fixating only over the outcome.

As an aside, a question which comes to this author’s mind after reading Delhi Airport Metro is that keeping all the other facts and circumstances of the case constant, if CAF India had initiated arbitration proceedings against Delhi Airport Metro Express Limited by itself and not along with CAF, would the arbitration proceedings still have been valid? A simpliciter “pro-arbitration” finding would probably be inclined towards answering in the affirmative, but a substantive analysis may yield otherwise (see here).

- Sujoy Chatterjee

[1] An analysis of the rationale for Delhi Airport Metro is beyond the scope of this post.

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